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Inflation, expensive fuel may eat into household budget: Economists
India's households may cut purchases of a range of goods - including biscuits, breakfast cereals, automobiles, hair oils, shampoos, detergents and white goods - this year because of the rise in prices and costlier fuel, economists say. Household spending on fuel and transport could rise by almost 2.5 percentage points in FY23 because of higher prices, HDFC Bank estimates, which may force spending cuts on other items as home budgets are adjusted.
The increase in prices of goods as producers pass on higher transport and input costs is also expected to impact demand. Further, a shift in demand for services as the pandemic wanes, could hit demand for goods.
Non-fuel and transport consumption is likely to drop by 1.7 percentage points due to projected high retail inflation of 5.1-6.2%.
Private consumption may grow slower than 8% in FY23 due to the combined impact of all these factors on households.
Motor Fuels & Edible Oils
In FY22, the share of private consumption in gross domestic product (GDP) was 56.6%, below the pre-pandemic level of 56.9% in FY20.
The higher price of fuel and edible oil are likely to compress disposable incomes in the mid- to lower-income segments, constraining demand revival in the next fiscal year, said Aditi Nayar, chief economist, ICRA.
The Reserve Bank of India (RBI) raised the consumer inflation forecast for FY23 to 5.7% on Friday from 4.5% estimated in February as it slashed the growth forecast for the year to 7.2% from 7.8%. "We estimate that the initial impact on inflation from the European conflict is likely to be around 50 basis points, coming from higher prices for motor fuels and edible oils," said Rahul Bajoria, MD and chief India economist, Barclays.
One basis point is one-hundredth of a percentage point.
HDFC Bank expects inflation at 5.5-5.7% in FY23 led by the direct and indirect impact of rising commodity prices. "We expect household spending on fuel and transport to rise by almost 2.5 percentage points in FY23 and non-fuel and transport consumption to drop by 1.7 percentage points," said Sakshi Gupta, senior economist, HDFC Bank.
A shift in consumption patterns may also hit demand for goods. In the mid- to upper-income segments, normalisation of behaviour after the third Covid wave is set to shift consumption toward contact-intensive services that were avoided during the pandemic, squeezing growth in demand for goods in FY23, said Nayar.
Russia-Ukraine War
Consumer sentiment is likely to witness a further dent due to the Russia-Ukraine conflict that has rallied commodity prices.
"A 10% on-year increase in petroleum product prices without factoring in currency depreciation is expected to push up retail inflation by 42 basis points and wholesale inflation by 104 basis points," said Sunil Kumar Sinha, principal economist at India Ratings and Research.
Similarly, a 10% on-year increase in sunflower oil without factoring in currency depreciation is expected to push retail inflation by 12.6 bps and wholesale inflation by 2.48 bps.
"Commodity prices have been increasing and the situation is worsened by the Russia-Ukraine war and higher Covid cases in China that have disrupted supply chains. We expect 5.8% retail inflation in FY23 as supply chain disruptions magnify," said Upasna Bhardwaj, economist, Kotak Mahindra Bank.
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